PUBLIC TRUST AND PRIVATE TRUST

 Section 3 of the Indian Trusts Act, 1882 defines ‘Trust’ as follows: A “trust” is an
obligation annexed to the ownership of property, and arising out of a confidence reposed
in and accepted by the owner, or declared and accepted by him, for the benefit of another,
or of another and the owner:”
 There are two types of trust- 1) private Trust, 2) Public trust
 A private trust is body constituted usually for members of family, relatives, friends etc.
for benefit of one or more individuals who are, or within a given time maybe, definitely
ascertained. Formation of a private trust is governed by the Indian Trust Act, 1882.
 Public Trust is created for the larger group, such as a community, etc. It is instituted for
the general public. Public trust has a specific purpose. A private trust is divided into two
types, charitable public and religious public trust. As the name suggests, the charitable
public trust is created for charitable purposes, and the religious public trust is established
for religious purposes only. There can be a public trust for both charitable as well as
religious purposes. There is no central law governing public charitable trusts, although
many states have state specific laws governing public charitable trusts. In the absence of a
public charitable state law in any particular state or territory, the general principles of the
ITA are applied.
 In Deoki Nandan v. Murlidhar (AIR 1957 SC 133) the hon’ble Supreme Court has laid
down the difference between a public trust and a private trust as follows: The distinction
between a private and a public trust is that whereas in the former the beneficiaries are
specific individuals, in the latter they are the general public or a class thereof. While in
the former the beneficiaries are persons who are ascertained or capable of being
ascertained, in the latter they constitute a body which is incapable of ascertainment.
 Advantages of Public Charitable Trust-
1. Public trust is more permanent than private trust.
2. Public charitable trust has legal status because it can be registered in a state
while in most cases private trust is not required to be registered, other than
when there is a transfer of immovable property, a certain amount of equity
assets, etc.
3. Public charitable trusts have the option of amalgamation/merging with another
public charitable trust with similar subjects that require prior approval from
the respective state laws as applicable.
 4. Income Exemption: Income to the extent it is applied or deemed to have been
applied for charitable or religious purposes in India of a wholly or partly
charitable or religious trust would be exempt from tax, provided the Charitable
Trust is registered u/s.12AA of the Income Tax Act, 1961.
5. Income Accumulation: Income accumulated or set apart, subject to maximum
of 15% of the income, which is allowed to be accumulated u/s.11(1)(a) of the
Income Tax Act, 1961. Income in excess of 15% can be accumulated as under,
as per section 11(1) read with explanation 1 of the Income Tax Act, 1961, if
Form 9A is filed online on or before the filing of the Income Tax return as
specified u/s.139(1) of the Income Tax Act, 1961 with the reason as to why the
income need to be accumulated.
6. Trust can be formed for charitable / religious purposes, enabling the settlor to
implement the desire to do something valuable for either (i) public at large
with a specific agenda, say providing financial help for medical treatment,
basic education, higher education, woman empowerment, disabled people or
(ii) religious purposes.
7. Since the public trusts are governed under the applicable laws of the state and
broadly, they are monitored by the Charity Commissioner, the chances of
fraud and manipulations by the Trustees is very rare.
 Disadvantages of a Public Charitable Trust:
1. There is no Central Act applicable for Public trusts, but various states have
enacted their own acts suitable to their conditions and administration.
2. The Charity Commissioner has been given wide powers for better
administration and management if the same is used properly and diligently
however currently it is more of a hindrance.
3. Alteration of the objects laid down in the trust deed is difficult and time
consuming. In case of modification of objects, the Trust will have to reapply
for 12AA registration.
4. A Trust cannot be dissolved easily, though a new clause allowing dissolution
has been introduced but it requires adequate reason to be given to the Office of
Charity Commissioner and it has a huge Income Tax liabilities such as tax on
accreted income under section 115TD of the Income Tax Act, 1961.
 Advantages of a Private Trust:
 1. Succession Planning- Succession planning through private trusts, allows the
settlor to have complete control over the Trust and freedom to pass on the
assets unto the beneficiaries, which can be set out in the Deed by the settlor.
2. Estate Planning- A trust is a vehicle through which the estate owner can
transfer his property to some beneficiaries and at the same time benefit from it.
3. No need for registration- A private Trust is governed by the Indian Trust Act,
1882 and it does not need to be registered.
4. Confidentiality- Family trusts are not publicly registered and therefore can be
kept confidential. It can mask the real owner and hide his personality from the
public glare and still allow him with a great freedom to operate.
 Disadvantages of a Private Trust
1. Not Perpetual- A Private Trust cannot be formed for life it always has a end
limit.
2. Expense- One of the primary drawbacks is the cost necessary to establish it.
This most often requires legal assistance and administering the trust may also
add expenses.
3. No tax Advantages- Trusts do not provide any particular tax advantages.
4. Future Law Changes- Possible changes to legislation of trust law may remove
or effect some of the original objectives for the trust formation.

SECTION 8 COMPANY

 The concept of Section 8 companies was introduced in Companies Act 1913 that
permitted companies with charitable objects etc. to be registered without the words
‘Limited’ or ‘Private Limited’. The restriction was that the Companies were permitted
to use the profits only for the purpose for which the company was promoted and there
was a prohibition on distribution of dividend.
 Section 25 of Companies Act, 1956 was introduced for such companies based on
English Companies Act 1948.
 The Companies Act, 2013 continues with the provision for such companies and
provides for a framework for the same under Section 8 of the Companies Act, 2013.
 Section 8 continues to provide for restriction on application of profits and permits the
same only for the purpose for which the company is promoted, prohibits declaration
 of dividend, continues to permit partnership firms to be a member of section 8
companies etc. 2013 Act elaborates on the objects for such companies and specifies
objects like sports, education, research, social welfare and protection of environment
for which the Companies can be formed under this section.
 Conversion of Trust to Section 8 company:
Section 8(1) of the Companies Act, 2013 allows person or association of persons to be
registered as a Section 8 Company on fulfilment of certain conditions and procedure
as prescribed therein. The term “person” has not been defined in the Companies Act,
2013. Section 2(41) of the General Clauses Act, 1897 provides that “person” shall
include any Company, or association or body of individuals, whether incorporated or
not. Accordingly, a Trust is a person. Therefore, there is no bar in conversion of trust
to Section 8 Companies.

 Features of a Section 8 Company

1. A Section 8 company comprises of the following distinct features that most
other kinds of companies do not have:
2. Charitable objectives: Section 8 companies do not aim to make profits. Their
objectives are purely charitable in nature. They aim to further causes like
science, culture, research, sports, religion, etc.
3. No minimum share capital: Section 8 companies, unlike all other companies,
do not require a prescribed minimum paid-up share capital.
4. Limited liability: Members of these companies can only have limited liability.
Their liabilities cannot be unlimited in any case.
5. Government license: Such companies can function only if they have the
Central Government’s license. The Government can revoke this license as
well.
6. Privileges: Since these companies possess charitable objectives, the
Companies Act has accorded several benefits and exemptions to them.
7. Firms as members: Apart from individuals and associations of persons,
Section 8 also allows firms to be members of these companies.
 Formation of Section 8 Company
A person or an association of persons can make an application to the Registrar of
Companies using requisite forms to form a company with charitable objectives under
 Section 8 of Companies Act. The Central Government, if satisfied, can accept such an
application upon any terms and conditions imposed under the license granted by it.
Once accepted, the Registrar of Companies will register the company after the
applicants pay all requisite fees.
It is important to note that such companies can only be limited companies. All
privileges and obligations of limited companies apply in this case. Further, these
companies also do not need to include the words “Limited” or “Private Limited” in
their names, as all other companies have to.
Since the existence of such companies is based on the license granted to them, they
cannot even alter their memorandum or articles of association without the Central
Government’s permission. They also cannot do anything that the license disallows.

 Eligibility For Forming Section 8 Companies

 A company which intends to be registered under the Section 8 of the
Companies Act, 2013 should keep these rules in mind before registering.
 The company’s objective should be promoting fields like arts, science,
commerce, education, religion etc.
 The company should use the profit from the organization in promoting the
objectives of the company.
 The company should restrict the share of dividends to its members.
 Section 8 companies can only be registered as Private or Public Limited. It
cannot be registered as one person Company (OPC).
 The company must confirm the proposed name, its objectives, registered
office address, authorized capital, proposed Director and the members.
 The name of the company should reflect the charitable objective. Also the
proposed name must be different from the category of undesirable names
specified in Rule of Companies Act.
 The company’s name must include the words like Foundation, Forum,
Association, Chambers, council etc.
 Requires license from the Central Government.

 Cancellation of License
 Section 8 companies require a grant of a license by the Central Government. All such
licenses are revocable as well on the following grounds:
1. the company contravenes provisions of Section 8;
2. terms of the license are violated;
3. when its conduct is fraudulent, or it violates its own objectives and public
policy.
4. The Government can even order the company to be wound-up or amalgamated
with another similar company under certain circumstances. The Government
has to hear the company before passing such orders.

 Winding Up
Section 8 companies can wind-up or dissolve themselves either voluntarily or under
orders given by the Central Government. If any assets remain after satisfaction of
debts and liabilities upon such winding-up, the National Company Law Tribunal can
order the transfer of these assets to a similar company. It can also order that they must
be sold and the proceeds of this sale should be credited to the Insolvency and
Bankruptcy Fund.

 Punishment for Contravention

Any company that contravenes provisions of Section 8 is punishable with a fine
ranging from Rs. 10 lakhs to Rs. 1 crore. Further, directors and officers of the
company are liable to punishment with imprisonment up to 3 years and a fine between
Rs. 25,000 to Rs. 25 lakhs. Such officers can also face prosecution under stringent
provisions of Section 447 (dealing with fraud) if they conduct any affairs with
fraudulent motives.

 Advantages of section 8 company

People generally prefer to conduct charitable activities by forming Section 8
companies instead of regular NGOs and associations. This is because they have
limited liability, so their personal assets will not be used in paying debts of the
company. Here are some advantages:
1. Tax Benefits- Section 8 companies are exempted from the provision of income
tax. Also, these companies get other tax benefits and deductions.
 2. Zero Stamp Duty- Unlike other companies, Section 8 companies do not need
to pay stamp duty on the AOA and MOA of the private or public limited
companies.
3. Ease Of Transferring The Ownership Or Title- According to the Income Tax
Act, 1961, Section 8 Companies can transfer their ownership or title. Also, the
interest and shares of other members of the company is also considered as
movable property and are easy to transfer which in turn makes it easier for the
members to leave and transfer its ownership to others.
4. Exempted From The Title “Limited”- Section 8 companies are exempted from
using the word “Limited” unlike other companies like private limited company
and public limited company. However it is mandatory for the section 8
companies to use the suffix such as Foundations, associations etc.
5. Higher Credibility- Section 8 companies are more credible than other non-
profit organizations like societies or trust. The licensing of these companies is
done by the Central government. So, no changes can be made in the AOA and
MOA of the Company.
6. No minimum capital requirements.
7. They have perpetual existence and separate legal status.
8. Exemptions from carrying out several procedural compliances.

 Disadvantages
1. Members of the company cannot get any dividend. The profit earned by the
Section 8 companies cannot be distributed among its members.
2. Officers and directors do not get benefits and allowances.
3. Can only use the profits for furthering charitable aims and objectives.
4. The license is revocable on several grounds.
5. The profit that the section 8 Companies make is used for the meeting the
objectives like arts, commerce, science. It cannot be used by the director or
shareholders by any means.
6. The members of the Section8 Companies cannot be appointed as the officer.
7. The members cannot make changes in the MOA and AOA of the company
because the licensing is done by the Central government.